How to build credit in 3 steps

How to build credit
Key Takeaways:
  • It takes at least six months to build a credit score.
  • Credit-building tools include rent reporters, retail store cards, authorized user accounts, co-signers, secured credit cards, and secured loans.
  • Paying your bills on time is the most important thing you can do for good credit.

“It takes credit to build credit.” 

That’s a catch-22 that most people trying to build or rebuild a credit score have probably heard. You might be wondering how you can possibly build a good credit score if you can’t get credit in the first place.

Fortunately, it’s very possible—and not that difficult—to build good credit step by step. The roadmap below shows you the way.

What does it mean to build credit?

Building credit means creating a track record. In the future, when you want someone (a credit card company, a landlord, a utility company, etc.) to give you money or trust you to pay later, they can review your credit history to decide. Your credit report tells lenders how much you borrowed and whether you repaid it as agreed. 

Why do lenders need to review your track record? Because they are just like you. 

Imagine that you’re considering an expensive purchase on eBay or thinking about renting a pricey Airbnb. If the seller or property has no reviews (or worse, poor reviews), you’ll probably think twice about parting with money upfront. Lenders are the same way—your credit report is like the customer reviews on eBay, Trip-Advisor, or any other review site. 

How to build your credit in 3 steps

The three steps to establish credit are:

  • Open one or more appropriate credit accounts

  • Use the accounts responsibly

  • Monitor your credit

Let’s get into each of those in more detail. 

Step #1: credit accounts 

It takes at least one account reporting for six months to generate a credit score. Your first step in establishing credit is figuring out your starting point. The government maintains a free site, annualcreditreport.com, for consumers to check their credit history. You might want to visit it to make sure that there are no surprises in your record—like collections or accounts you never agreed to. 

If no credit data has been reported about you, you might not have a credit report to check. 

Report your rent

Assuming your credit report is pure and empty, your next step is to add some good stuff. Are you paying rent? As long as you’re paying on time, consider adding your rent payments to your credit history. You can ask your landlord or property manager to report your history or DIY it through one of many rent reporting services—just compare costs and make sure they report to the “big three” bureaus.

Become an authorized user

Want instant credit? If you have friends or family members with great credit, it’s possible. By adding you as an authorized user on their credit cards, your loved ones can transfer some of their good payment history to your credit report. 

When you become an authorized user, you aren't responsible for making payments, but you’re technically allowed to use the account. Here are two cautions – first, don’t abuse your loved one’s trust. It’s probably best if you don’t use the account at all. And second, be selective about who you ask because if they pay late, it could hurt your credit.

Get a secured credit card

A secured credit card looks and works like a regular credit card. But to get one, you need to put up a deposit. You’re not prepaying for your purchases. If you use the card, you need to pay your bill every month. If you fail to make your payments, the card issuer can keep your deposit. 

Use your secured credit card for small purchases and pay the balance in full every month. If you manage it successfully for 6-12 months, one of two things will happen. Either the issuer will automatically return your deposit and convert the account to a regular unsecured credit card, or you can apply for an unsecured credit card yourself, close the secured account, and ask for your deposit. 

When you look for a secured card, make sure the fees are reasonable (do some comparison shopping) and be sure that the issuer reports your history to the major credit bureaus. 

Get a secured loan

Secured loans are legitimate credit. Secured loans are backed by an asset that the lender can repossess if you don’t repay your loan as agreed. If you have a savings account or another asset, you might be able to borrow against it.

Mortgages and auto loans are secured loans backed by the home or car they finance. Secured personal loans can also be backed by an asset that you pledge to the lender. Secured loan payments, like credit card payments, are considered on-time by credit bureaus if paid within 30 days of their due date. 

Start with retail cards

Retail or store cards have a reputation for being easier to get than other cards. That’s because retailers use cards as a marketing strategy, tempting you to shop with them more often and to spend more. Retailers often offer an incentive to apply for their cards—a discount on future purchases, for instance. And you may be able to earn merchandise rewards. 

But retail cards can also deliver some serious disadvantages. First, the interest rates are high. That’s not an issue as long as you don't carry a balance. But if you do, the payment and balance could get out of hand quickly. Second, the barrage of store marketing can persuade you to charge things you didn't need or plan to purchase. If you’re an impulse buyer, retail cards can be dangerous. 

Find a co-signer 

If you have a limited or poor track record with debt, enlisting a co-signer can make lenders more likely to approve your application. Adding a co-signer may also get you better credit terms. 

However, co-signing can be very dangerous for your loved one—and for you, if it ruins your relationship. That’s because a late payment from you doesn’t just harm your own credit—it can also end up on your co-signer’s credit report. And if you default (don’t pay your loan), the lender will probably come after your co-signer for what you owe. 

Co-signing for your loan also creates what’s called contingent liability for your co-signer —a debt they don’t owe but could be held legally responsible for—and that can make it harder for them to get other financing, like a new mortgage. 

Step #2: responsible use

Once you have a few active accounts, use them to develop a solid history and great credit rating. This won’t happen overnight, but you'll get there with careful management. Create an unbroken string of on-time payments for each account. And use your credit very conservatively, both to improve your credit score and to avoid debt problems. 

Eventually, you’ll be offered more credit for the things you need—a mortgage for a home, auto financing the next time you need a car, and so on. Being able to handle a variety of loans demonstrates that you’re a good credit risk, worthy of lower interest rates and more attractive offers.

Pay your bills on time

Payment history is the most important component of your credit score, and the only one that can’t be rushed. Be careful—months of on-time payments can be wiped out by being late just once.

So use whatever tools you need to make every monthly payment on time. A wall calendar. Automatic bill-pay from your bank. Email reminders from your creditors. Budgeting apps. Whatever it takes. When you get paid, pay your creditors. And don’t charge more than you can pay off right away. It takes practice to get it right, so be extremely careful in the first year or two. 

Watch your credit limits

The second most-important factor in credit scoring is your credit utilization ratio, also called “amounts owed” or “balance-to-limit.” This number shows how much of your available credit you’re using. If your credit card balance is $150 on a card with a $300 credit limit, your utilization is 50%. Utilization is tracked for each card and overall. 

Statistically, you’re much more likely to default on your loans if this number is high, and that’s why high utilization lowers your credit score. Credit utilization only applies to revolving accounts like credit cards, not to installment loans like your auto financing. 

The good thing about credit utilization is that even if you take a hit one month because you had to charge something expensive, all you have to do is pay it off for your score to recover. 

You can also lower your utilization by increasing your credit limits or opening up new credit lines. If you owe that same $150 on a card with a $1,000 limit, your utilization is only 15%.

Cautiously add other types of debt

As you practice good debt management and paying your bills on-time, you’ll probably start getting more and better offers from creditors. It’s always nice to be wanted, but don’t jump on these opportunities until you are extremely comfortable with your finances. 

Avoid expanding your credit use without considering what it will cost and how you’ll pay for it. And don’t take on new credit if you’re struggling to pay off your balances.

That said, if you’re using credit conservatively, paying your bills on time, and have started an emergency fund, you may be ready for a car or home loan. Just make sure that if a new loan increases your monthly expenses, you can afford the extra costs. Plan for that payment, don’t wing it.

Step #3: monitor and track your progress

Your credit report and credit scores are only as accurate as the data reported. Creditors and reporting agencies can make mistakes, so it’s up to you to check your credit and score routinely. This can help you catch reporting errors, head off identity theft, and make sure that your spending stays under control. 

Check your credit

You can pull an official credit report for free three times a year at annualcreditreport.com. Each credit bureau has to give you one free report a year, so pick a different bureau every four months and check its report for errors. 

Sites that offer fee-based credit monitoring services sometimes also provide free versions. Your bank or credit cards might supply free credit reports and scores monthly as a benefit to you. If you have access to multiple free credit data sources, check them all. 

Understand what “free credit report” or “free credit score” means

Understand the true cost of any “free” offer. Don’t give out your credit card number to get a “free” credit score—why do they need a payment source for a free service? And remember the saying: “If the product is free, you are the product.” 

This means that in exchange for free credit information, the provider is getting something from you—perhaps contact information it can sell to marketing companies, or the opportunity to provide credit card offers to you. Or it might hope to persuade you to upgrade from a free to a paid monitoring service. That’s not necessarily bad, but be aware.

Make sure that your credit and payments are reported

When you open a new account to build your credit score, make sure the creditor uploads your account and payment history to the credit bureaus. If you’re reporting rent payments, make sure they show up on your credit reports. Double-check your credit limits, balances, and payment history for accuracy. 

Perform damage control if needed

Anyone can make a mistake. Payments get lost in the mail, fall through the cracks, or get misallocated. If your creditor misreports a payment—or even if you made a mistake and paid late—there's hope. 

If the creditor is in error, contact it right away and send proof of your on-time payment. If you did pay late, contact the creditor anyway. Apologize, explain, and follow up with a goodwill letter. If your account is in good standing and you play your cards right, they might remove the late payment from your report. If they do, it’s usually a one-time benefit.  

Your first credit account dos and don’ts

“You only get one chance to make a first impression.” 

That adage applies to a lot more than job interviews and social situations. Future creditors will judge you by how you handle your first accounts. Here are some crucial “dos” for your first credit experience:

  • Do make sure that the credit card or loan provider reports your payment history to the three main credit reporting agencies—Experian, Equifax, and TransUnion. Otherwise, you’ll have no track record for future lenders to review. 

  • Do pay on time, every time. Every month is an opportunity to build positive history and improve your credit score—or to fail and set yourself back. It can take months to recover after missing just one payment. Fortunately, your payment must be more than 30 days late to hurt your credit score (but you might pay a late fee if you’re even one day late). Use tools to avoid mistakes, like a calendar, email reminders, autopayments, or whatever works for you.

  • Do focus on building credit, not on spending. Your objective is to create good payment habits and establish a track record. Not to borrow as much as possible immediately. Use your account for small purchases that you’d make anyway—like a tank of gas or groceries. Pay off the balance in full every month. If you can’t, cut back on your charges.

  • Do keep balances low. While payment history is the most important factor in developing a credit score, your balance-to-limit ratio (also called credit utilization) is almost as critical. Don’t max out your card or come anywhere close to maxing it out. 

And here come the don’ts:

  • Don’t max out your first credit card and carry a balance. A high balance hurts your credit score. And if you fail to pay the balance in full, you’ll be charged interest—likely a fairly high rate. 

  • Don’t borrow or charge just because you can. If you wouldn’t buy an item or service for cash, don’t charge it. 

  • Don’t set-and-forget your credit. Monitor your credit score and report to make sure that your history is accurately reported, that you’re not falling victim to identity theft, and that your score is increasing.

Frequently Asked Questions

How long does it take to build a good credit history?

To generate a credit score, you need at least one account open and reporting to credit bureaus for six months. It can take much longer to get your score into the highest levels – eight to ten years for top-drawer (750 FICO or higher) credit. Try anyway. About 15% of consumers get it done in under four years. 

How many credit cards do you need for good credit?

You only need two to three credit cards to build a good credit score. But you might build good credit sooner if you use different types of credit. Installment loans like a student loan or car loan can help you, as long as you’re paying on time. And a mortgage can be a valuable part of the mix. 

Does getting turned down for credit hurt my credit score?

Lenders don’t report when they decline your application, and that’s not a factor in your credit score. However, most lenders check your credit when you apply for an account. That generates an inquiry, and each inquiry can cause a small drop in your score. Avoid unnecessary credit score damage by checking a lender or card issuer’s requirements before you apply for credit. Inquiries stay on your credit history for two years but only affect your FICO score for 12 months.